Euro zone business growth recovers, but outlook darkens

BENGALURU (Reuters) - Euro zone business growth nudged up in August and may provide some modest cheer for policymakers, a survey showed, but the weakness in manufacturing and future expectations will keep the European Central Bank on track to ease policy in September.

The skyline, with the banking district and the European Central Bank (ECB) visible, is photographed in Frankfurt, Germany, August 13, 2019. REUTERS/Kai Pfaffenbach

Despite increasing worries about a global slowdown, the U.S. and China have shown no sign of backing down in their trade war. That has helped make euro zone businesses even less hopeful of a significant acceleration in economic activity anytime soon.

“Today’s upside surprise is positive and suggests the slowdown hasn’t worsened at this stage. But the pace of expansion remains well below trend, warranting ECB easing next month, in our view,” wrote economists at Morgan Stanley in a note to clients titled “Curb Your Enthusiasm.”

IHS Markit’s Euro Zone Composite Flash Purchasing Managers’ Index (PMI), seen as a good guide to economic health, climbed in August to 51.8 from 51.5 in July and above 51.2 predicted in a Reuters poll. Anything above 50 indicates growth.

The composite future output index measuring overall business optimism sank to 55.5, its lowest since May 2013, from 58.8 in July.

IHS Markit said the PMI suggested economic growth could range between 0.1% and 0.2% this quarter, weaker than the 0.3% predicted in a Reuters poll.

But what is more worrying are signs Europe’s largest economy is heading for a mild recession, with a contraction in German manufacturing driven by the ongoing trade war outweighing an uptick in services activity.

IHS said the data suggested another minor contraction in German gross domestic product in the third quarter based on the survey data, meeting the technical definition for a recession.

In France, business activity expanded this month, offering some signs of hope after a recent slowdown.

Across the euro zone, there was a modest revival among firms operating in dominant services industry. The flash services PMI rose to 53.4 from July’s 53.2, above the 53.0 expected in a Reuters poll.

But in another sign of scant optimism in boardrooms, a business expectations sub-index fell to a near five-year low of 57.3 from 61.2 in the previous month.

Factory activity contracted for the seventh month in a row, although at a slower rate than the previous month, with the related index rising to 47.0 from 46.5 in July, beating the 46.2 forecast in a Reuters poll.

An index measuring output, which feeds into the composite PMI, came in at 47.8, marking a slower pace of contraction than the 46.9 logged in July.

However, the future output index which measures optimism among factories, fell to 51.0, its lowest since November 2012.

“As recession concerns dominate headlines and downside risks are still increasing, small wins should be celebrated,” wrote Bert Colijn, senior euro zone economist at ING.

“The small increase in August PMIs is a small win, but at least it indicates that the euro zone economy is unlikely to have slipped into negative growth halfway through the third quarter.”